War With Iran Could Cost Israel $42 Billion - Or A Lot More

A hospital in the coastal Israeli city of Haifa in flames after being hit by Hezbollah's Katyusha rockets at the beginning of the 2006 Lebanon War. Photo: Wikipedia Commons

War with Iran could cost Israel nearly $42 billion.

That's according to BDI-Coface, the Israeli research branch of the worldwide credit insurance company Coface, and the largest business information group in the country.

BDI-Coface estimates that initial direct damages could amount to $11.7 billion. Indirect effects could take another $6 billion out of the economy over the next three to five years, chiefly from business collapse and other consequences. High-end estimates then put the total costs near to $42 billion over five years. Israel's total GDP in 2011 was $235.2 billion, according to the International Monetary Fund (BDI-Coface's estimates are based on valuing the Israeli economy at $216 billion in 2011).

That means the initial direct damages from a potential war could cost Israel about 5 percent of its economy.

Accurate prognostications on the costs of a war are difficult at best, since no one knows how a conflict will unfold. A longer, protracted war with Iran would of course drive up the costs of the conflict. Major infrastructure sites for water, gas, or electricity, if permanently destroyed, could incur even more losses. How the conflict would shape the region and Israeli relations with other nations in the Middle East or abroad could generate still other unintended losses to commerce or trade. The human costs also could be devastating. In frank terms, any lost population and additional burdens on the health system would be other serious blows to an economy.

Israel 2006 war with Lebanon and Hezbollah, the extremist militia-political organization backed by Iran and Syria, which lasted just over a month, caused damages to infrastructure worth some 1.3 percent of the total Israeli economy. The country then suffered a subsequent 0.5 percent reduction to economic growth.

While damage suffered in 2006 was mostly located in the north of the country, Iranian retaliatory strikes would more likely hit other areas as well.

Reuters quoted BDI as saying that "It is reasonable to assume that in the event of a war, it would also involve the center of the country, which produces 70 percent of Israel's economic activity."

The governor of the Bank of Israel, Stanley Fischer, said the central bank was preparing for a possible financial crisis resulting from a war.

On Aug. 10, Fischer told Israeli media, "The primary responsibility of each country is to maintain its security. It is possible to describe situations of widespread war which would be very difficult to deal with. We are preparing for a major crisis and for a security situation which is much worse."

Iran announced a series of new weapons on Tuesday, including an upgraded version of a short-range ballistic missile called the Fateh-110, capable of hitting targets at land and on sea up to 186 miles (300 kilometers) away. The new missiles could be used to strike at U.S. forces in the Persian Gulf in response to an Israeli or a joint Israeli-U.S. attack. Iran is thought to possess some 100 medium-range ballistic missiles capable of striking Israel. Iran-backed groups on Israel's borders, such as Southern Lebanon's Hezbollah, are thought to hold tens of thousands of missiles, rockets, and bombs capable of hitting the country.

Iran also said it had set up a new air defense site some 210 kilometers (130 miles) to the south of a known uranium enrichment facility near Isfahan. The site is expected to be built in the Abadeh area by the engineering division of the Islamic Revolutionary Guard Corps. Analysts think the newly released information from Tehran is meant to warn and intimate opponents as speculation of a coming Israeli military strike against Iran grows.

Israeli Prime Minister Benjamin Netanyahu and Defense Minister Ehud Barak have said they see the window of opportunity for launching an effective strike as closing. But senior military officials in Israel are thought to be hesitant to attack Iran without at least tacit backing from Washington.

Comments from U.S. officials, including Secretary of Defense Leon Panetta, reveal efforts to dissuade Israel from taking unilateral action, urging it to allow time for sanctions and diplomatic efforts to apply further pressure on Tehran.